Email notification sign-up

International Cooperation for High-Quality Growth: The Role of the IMF at 50--Address by Michel Camdessus

December 21, 1994

95/1

DELIVERED IN SPANISH

Address by Michel Camdessus
Managing Director of the International Monetary Fund
at the Debating Club, Complutense University
Madrid, December 21, 1994

It is a great pleasure for me to return to Madrid--where, as you know,
the IMF and the World Bank held their rather eventful Annual Meetings almost
three months ago--and to visit this University, and to discuss with you
some aspects of the recent evolution of the IMF. The Madrid Annual Meetings
were special in many ways, and one was that they took place in the context
of our 50th Anniversary. It was 50 years ago last July that the Bretton
Woods Conference produced the agreements that led to the birth of the IMF
and the World Bank. Such anniversaries provide excellent opportunities
for reflection, and naturally the ministers and central bank governors
from our 179 member countries, and the crowd of officials and international
bankers who were also meeting in Madrid had to consider a question akin
to the one that Hamlet asked: is the IMF, established by 44 countries in
the very different circumstances of 1944, still relevant to our times?
Their answer was a very clear "yes"--and it is my answer also--and
I shall try to indicate some of the reasons why, by telling you, first,
about some of the policy agreements that were reached at these Annual Meetings;
second, about the Fund's work to help the countries in transition; and
third, about the Fund's efforts on behalf of the poorest countries in the
world.

But let me begin by reminding you why the IMF was established. Its purposes,
set out 50 years ago, are, in a nutshell: to promote international monetary
cooperation and exchange rate stability; to assist in the elimination of
exchange restrictions which hamper the growth of world trade; by facilitating
the balanced growth of international trade, to help promote high levels
of employment and real income, and economic development; and to help member
countries solve their balance of payments problems, including through the
temporary provision of financial assistance.

These are the purposes the Fund has been serving over the past 50 years,
through its policy advice to member governments and the financial and technical
assistance it has provided to them. Indeed, these purposes of the Fund
have become increasingly vital over the past five decades, for consider
the changes the world has seen. In particular, consider the implications
of globalization, one of the most striking developments of the closing
decades of the 20th century. Markets have become more closely integrated
internationally--partly a result of progress in technology, but also something
to which the Fund has contributed by promoting an open, multilateral system
of trade and payments. National economies have therefore become more closely
linked and interdependent. And formerly centrally planned economies are
now in the process of integrating themselves into the global market economy.
The Fund's purposes have become increasingly vital because developments
like these have meant that the need for international cooperation in economic
and monetary matters, and for international monetary stability, has become
even more essential. With the effects of each country's policies spilling
over on to other countries more than ever before, international cooperation
is more essential than ever to promote high levels of real income and employment,
and economic development, and to promote in all countries the broader objective
of what I call high-quality growth. By this I mean economic growth that
is sustainable, that reduces poverty and distributional inequalities, that
respects human freedom and national cultures, and protects the environment.
High-quality growth is an ambitious objective indeed. But it is the only
way that the world's economic and social challenges can be met. And more
than ever in today's highly integrated world, it can be attained only through
international cooperation.

So how does the IMF serve international cooperation and the purposes
for which it was established? One way is through what we call surveillance,
and another is by means of direct technical and financial assistance. Let
us begin by looking at this "surveillance" by the IMF over member
countries' economic policies. This responsibility for exercising "firm
surveillance" over the exchange rate policies of members includes
looking, in one country after another, at all policies affecting exchange
rates. I would say that surveillance is at least on a par with financing
as a central activity of the IMF. When the Fund is in the headlines, the
story is usually about its lending to some member country. But lending
is essentially a temporary activity vis-a-vis a given member undergoing
a crisis, whereas surveillance continues year-in and year-out, and applies
to all members. IMF surveillance is conducted through our annual consultations
with individual member countries; through policy dialogue with members
between consultations, as needed; and also through our consideration of
policy issues in a global context, notably in our twice-yearly discussions
of the world economic outlook, which continue with discussions at the level
of ministers and central bank governors in the Fund's Interim Committee,
which last met here in Madrid three months ago. It is important to remember
that this Committee is the only forum where economic policy makers representing
virtually the whole world--finance ministers and central bank governors--meet
regularly to reach understandings on policies and policy cooperation. It
is through the annual consultations that each member meets its obligations
to subject its policies to the scrutiny of the Fund, so that the rest of
the membership has an opportunity to comment on those policies and especially
their effects outside the country concerned. I should note as well that
these discussions are not limited to macroeconomic, balance of payments,
and exchange rate policies, but more broadly touch on all policies that
significantly affect the economic performance of a country, and their international
repercussions. These may include labor market, social security, trade,
and environmental issues, and so on, which is no mean undertaking.

The Fund has been making every effort to make surveillance more continuous,
especially for the largest countries, whose policies have the greatest
impact on the global economy, and more effective. The effectiveness of
surveillance has become all the more important as the growth and globalization
of financial markets have made the international monetary system more vulnerable
to inadequate policies. The globalization of financial markets, for all
the benefits it brings, also transmits the effects of weak policies among
economies faster than ever before.

What was done at our Madrid Annual Meetings to strengthen surveillance?
Even if the spotlights of the media concentrated on more controversial
and spectacular events, one of the most important developments was that
the Interim Committee issued a Declaration--it has become known as the
Madrid Declaration--which sets out a framework of policies for sustaining
and using wisely the current economic recovery. It refers to the main elements
of the economic policy strategies that industrial, developing, and transition
countries need to implement to sustain and improve their growth performance.
I should point out to this audience that it even refers to the need to
improve education and training as part of the efforts required to strengthen
growth and reduce unemployment in the industrial countries. But what is
more, the Committee agreed to establish a methodology for reviewing progress
in implementing the policies set out in its Declaration, beginning at its
next meeting in April; this is a significant step indeed. Together with
the IMF's Executive Board, we are now putting in place this practical review
process, so that the Madrid Declaration can represent a significant step
forward in the Interim Committee's contribution to economic cooperation
and the IMF's global surveillance.

Let me now turn to what the IMF has been doing, through its technical
and financial assistance, to help the countries in central and eastern
Europe and the remainder of the former Soviet Union achieve a successful
transition from central planning toward market-based systems, integrated
into the global market economy. There are 25 such countries, almost all
of which have joined the Fund within the past five years. Helping them
establish the conditions for high-quality growth has been one of the Fund's
greatest challenges in its 50-year history. To achieve success, these countries
have had to undertake bold policy programs of liberalization, macroeconomic
stabilization, and wide-ranging structural reforms, and the Fund's advice
throughout has insisted on the essential need for determined action on
all these fronts. But the Fund has also held throughout that these countries'
efforts must be supported by international cooperation--by open markets
abroad for their exports; by substantial external financial resources;
and by technical assistance.

And the Fund, at the request of its membership, has been playing a leading
role itself, which has involved a considerable re-orientation of its activities.
Fund staff have been engaged in intensive and virtually continuous dialogue
with practically all the countries in transition since, and often before,
they joined the Fund. The Fund has provided financial support for policy
programs in 20 of the 25 countries I have mentioned, in amounts totaling
US$20 billion since 1990. Sixteen of these countries have utilized the
systemic transformation facility (STF), a financing facility that the Fund
introduced early last year specially to assist countries in transition
to shift to multilateral, market-based trade. The Fund has also been playing
its usual role in mobilizing financial support from other creditors and
donors for the programs it has supported with its own resources, which
is what we refer to as its "catalyzing" role. In addition, the
Fund has been making a major technical assistance effort in a range of
areas that fall within its expertise, in cooperation with other international
organizations and our member governments.

So how much progress have these countries managed to make, with the
support of our international cooperative efforts? The answer is that progress
has been mixed; but progress there has certainly been. One leading group
of about ten countries--I am glad to say that the list is getting longer--have
made substantial progress on all policy fronts; and in particular, they
have gone far toward stabilizing their economies and bringing inflation
down to moderate levels. This group includes the three Baltic countries
as well as most of the countries of central Europe. And as a result of
their success with policies, all ten have begun to see economic growth
after several years of stagnation and decline. In fact, this group includes
some of the fastest growing economies in Europe.

A second group of countries have made some progress on all policy fronts,
but their efforts have been less consistent than those of the leading group,
and they have as yet failed to stabilize their economies and achieve a
sustained reduction in inflation to moderate rates. This group includes
Russia. The control of inflation in Russia has still not been secured:
it has picked up again since the summer to a monthly rate of about 15 percent.
This is clearly a matter of the highest concern and priority; and in recent
weeks a staff team from the Fund has again been in Moscow, continuing discussions
on a program that could bring about rapid disinflation and that would be
strong enough to justify the Fund's financial support. All the countries
in the second group, including Russia, are continuing to suffer from stagnation
and decline.

Then there is a third group of countries where, at least until recent
months, little progress has been made toward macroeconomic stabilization,
and inflation has been running at extremely high rates. In a number of
these countries, including Ukraine--which two months ago embarked on its
first Fund-supported program--the commitment to stabilization and reform
has recently strengthened. But all the countries in this group have much
still to do to establish the foundations of a market economy and the conditions
for sustainable growth.

The experience of the countries in transition has taught a number of
important lessons. Several countries--including countries of the former
Soviet Union--have by now proven the feasibility of implementing policies
of rapid liberalization, stabilization, and reform. And such policies have
indeed been shown to provide the key to successful transition and economic
recovery--the gateway to high-quality growth. International cooperation,
including official financing, has also proven its importance. But with
regard to external financing, I would make two points--which apply to all
countries--about how it is dependent on a country's commitment to and implementation
of good policies. First, private capital follows the establishment of stability
and confidence: this is shown by the large inflows of private capital that
have recently been seen in the successful transition economies of central
Europe and the Baltics. Second, the most beneficial and constructive official
assistance is assistance that is conditional on good policies. Without
strong policies in place, official financing may merely encourage the postponement
of adjustment, end up in capital flight, and add to the country's debt
burden with no benefit to the country. This is one of the reasons why conditionality
is attached to the IMF's lending, and why the Fund is able to mobilize
resources from other sources parallel with its own conditional commitment.

Both the countries in transition and the industrial countries have in
the past few years been looking for economic recovery--in the one case,
recovery from a traumatic collapse, and in the other, recovery from what
was in many industrial countries the most severe recession in recent decades.
And what were the developing countries doing in the meantime? Well, something
that has been quite remarkable in this period has been the strong growth
seen in the developing world. This was especially striking in 1993: in
spite of weak growth or recession in most industrial countries and a large
drop in output in the countries in transition, world output grew by 2 1/4
percent and world trade by 4 percent. And the source of this growth was
essentially the output growth of above 6 percent and import growth of above
9 percent of the developing countries. And we can narrow the source down
more than that, because the economic performance of the developing countries
has, of course, been very uneven. In fact, the source was about 40 developing
countries in Asia, Africa, and Latin America, which provided this impetus
to world growth through their sustained, self-generated economic success,
something that no one would have believed possible five years earlier.
And do you know what these countries have in common? It is that they have
undertaken strong and persistent structural adjustment programs, with the
financial support of the Fund, or otherwise with the help of our technical
assistance, or continuing with strategies designed in close cooperation
with the Fund. What is more, these countries include some which, just five
to ten years ago, were in an economic abyss as a result of the debt crisis.
Now here they are, providing the locomotive for the global economy! The
destiny of nations is obviously not preordained.

And 1993 was not an exception for these countries. Their dynamism was
already at work before last year, and it has continued in 1994, as it will
continue beyond. They have shown that for developing countries also, the
implementation of good policies, supported by international cooperation,
provides the key to high-quality growth. They have shown that countries
accepting the disciplines of full-fledged cooperation with the Fund and
the World Bank can in fact achieve substantial autonomy from the cyclical
fluctuations of activity in the industrial countries, integrate themselves
into the mainstream of international trade and exchange, and contribute
in the most positive way to global prosperity. The Fund is proud to have
contributed to this--proud, and determined to intensify its efforts in
support of this strategy. Let me give you another illustration of the contribution
that successfully adjusting developing countries have been making--this
time to the progress of other countries in the developing world. In 1987,
the IMF introduced a new facility--the enhanced structural adjustment facility
(ESAF)--to provide highly concessional assistance for low-income countries
to support their adjustment and reform efforts. This has become our key
instrument for help to the poorest countries of the world, especially in
Africa. At the beginning of this year, when the facility was about to expire,
it was refunded with the help of 45 of our member countries. And what is
remarkable is that 24 of those countries are developing countries, some
of which had recently benefitted from IMF financing, including through
the ESAF. Is it not remarkable to see countries like not only Argentina
and Mexico, but also Bangladesh, Egypt, and India, becoming creditors in
this way for one of the most concessional windows of international cooperation?

But as I said, progress in the developing world has been extremely uneven.
Many countries, because of inadequate policies or tragic circumstances,
continue to suffer from economic stagnation or decline, with their people
mired in extreme poverty. Rather than becoming integrated into the mainstream
of trade and exchange in an increasingly globalized world economy, these
countries face the risk of becoming increasingly marginalized. One of the
Fund's greatest responsibilities today is to encourage and help these countries
to lift their performance through policies of adjustment and reform. This
responsibility was very much in our minds when we replenished and strengthened
our ESAF this year. It was also a consideration this fall when, in response
to agreements reached at the Madrid meetings, we increased the access limits
on our facilities by 50 percent--a decision with considerable beneficial
significance for the developing world and the countries in transition.
And it is also why we are carefully considering the measures we could take
to be able to support more effectively the initial recovery efforts of
countries in "post-chaos" situations, such as, we hope, Rwanda,
as well as Angola, Somalia, and others.

A number of other adaptations of our instruments are being considered
that would be relevant to the needs of both developing and transition economies.
Let me just mention the proposal that has been under consideration for
some time, for the IMF to provide its member countries with a new allocation
of SDRs, the Fund's unique instrument for augmenting global reserves. In
my view, this would be an effective and fully justified way of relieving
the shortages of reserves that form such a serious constraint on many countries'
adjustment and reform efforts. You may have heard that the Fund's membership
failed to reach agreement on an SDR allocation at its Annual Meetings;
but discussions are continuing, and I am very hopeful of a positive outcome.

Let me also mention the fact that the Fund is fully aware of the need
to address not only the needs of the poorest, marginalized countries but
also the needs of marginalized people in all countries. In our programs,
we have, especially in recent years, been paying considerable attention,
in collaboration with World Bank, to the need for well-directed and cost-effective
social safety nets that protect the poor and those who are most
vulnerable to the adjustment and structural changes that countries need.
Protection of the poor and vulnerable is not only an essential part of
high-quality growth: it is also needed to sustain the public support required
for the implementation of adjustment and reform in a free society.

I have been speaking about some of the ways in which I believe the IMF
contributes to the international cooperative effort required to secure
high-quality growth in today's world. But what the Fund can do depends
upon the cooperation of its member countries; and they do sometimes disagree,
as you saw in Madrid three months ago! And in any event, the Fund cannot
do everything. It is up to countries to raise official development assistance
(ODA) from its current paltry levels to the UN objective of 0.7 percent
of GDP--a number that was so prominent on the demonstrators' banners here
three months ago. Metaphorically speaking, I myself have been holding up
that banner, in private discussions as well as public pronouncements for
many years! And it is up to countries to lower their trade barriers to
the exports of countries striving to raise their living standards. The
Fund cannot do everything. But I hope you agree that it can do, and is
doing, a lot to promote high-quality growth in the world.